02916cam a22002897 4500001000700000003000500007005001700012008004100029100002200070245015900092260006600251490004200317500001900359520153300378530006101911538007201972538003602044690005502080690010402135690009202239690008102331700002002412710004202432830007702474856003802551856003702589w11114NBER20161209093013.0161209s2005 mau||||fs|||| 000 0 eng d1 aAbbott, Thomas A.14aThe Cost of US Pharmaceutical Price Reductionsh[electronic resource]:bA Financial Simulation Model of R&D Decisions /cThomas A. Abbott, John A. Vernon. aCambridge, Mass.bNational Bureau of Economic Researchc2005.1 aNBER working paper seriesvno. w11114 aFebruary 2005.3 aPrevious empirical studies that have examined the links between pharmaceutical price controls, profits, cash flows, and investment in research and development (R&D) have been largely based on retrospective statistical analyses of firm- and/or industry-level data. These studies, which have contributed numerous insights and findings to the literature, relied upon ad hoc reduced-form model specifications. In the current paper we take a very different approach: a prospective micro-simulation approach. Using Monte Carlo techniques we model how future price controls in the U.S. will impact early-stage product development decisions in the pharmaceutical industry. This is done within the context of a net present value (NPV) framework that appropriately reflects the uncertainty associated with R&D project technical success, development costs, and future revenues. Using partial-information estimators calibrated with the most contemporary clinical and economic data available, we demonstrate how pharmaceutical price controls will significantly diminish the incentives to undertake early-stage R&D investment. For example, we estimate that cutting prices by 40 to 50 percent in the U.S. will lead to between 30 to 60 percent fewer R&D projects being undertaken (in early-stage development). Given the recent legislative efforts to control prescription drug prices in the U.S., and the likelihood that price controls will prevail as a result, it is important to better understand the firm response to such a regulatory change. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aI1 - Health2Journal of Economic Literature class. 7aL1 - Market Structure, Firm Strategy, and Market Performance2Journal of Economic Literature class. 7aL2 - Firm Objectives, Organization, and Behavior2Journal of Economic Literature class. 7aL5 - Regulation and Industrial Policy2Journal of Economic Literature class.1 aVernon, John A.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w11114.4 uhttp://www.nber.org/papers/w1111441uhttp://dx.doi.org/10.3386/w11114